Most people who buy an investment property will purchase it in their own name and don’t think about the alternatives. It’s worthwhile doing the numbers to see if buying the investment property inside your superannuation is good in your circumstances. Sometimes it can make a significant difference to the tax you pay.
Peter’s Story
Peter is a hardworking, 48-year-old IT professional. He currently works as a project manager in a multinational company. He has started to think about his retirement. He has $370,000 in his superannuation and would like to grow this for a comfortable retirement in 15-20 years’ time.
Peter has decided to buy an investment property as part of his retirement strategy. He currently owns his own home and likes the idea of owning an asset. Peter believes an investment in property will give him the growth he desires. Peter came to TAG to ask about the tax implications and options for ownership (personal vs SMSF).
Peter’s Goals:
- Build wealth for his retirement.
- Buy a property valued at $800,000.
- Understand the costs involved in the short term and long term.
Option 1 – Purchase in Peter’s name
If Peter purchases the property in his own name, he will need to consider the following:
The ability to borrow $844,000 (being the value of the property plus stamp duty and legal costs).
Does he have sufficient equity in his own home to support this purchase – or does he need to have a deposit amount saved?
He needs to ensure he has the income to fund the monthly loan repayments – e.g., $3,570 per month*
The tax benefits of negative gearing (are they worthwhile?).
Option 2 – Purchase in Peter’s super
If Peter’s super fund purchases the property, he will need to consider the following:
The ability to borrow $537,000 (after using $320,000 of the existing superannuation balance).
He needs to ensure he has the income to fund monthly loan repayments of $2,895. This can come from the rental property income ($1,550 p.m.) but it is also possible that it comes from superannuation contributions he can make ($1,600 p.m.).
The $71,516 Difference
In 15 years (at the age of 63), Peter is planning to sell the property and retire. The following table shows the difference to the net benefit between purchasing the investment property in his own name versus purchasing in his fund.
If Peter sells his investment property for $1.7 million after 15 years, buying the property in his super fund, improves his position by $71,516. Although the super fund has some additional costs along the way with setup costs and higher interest payments, there are larger savings in the form of tax on the rental income and capital gains tax.
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Disclaimer: The information contained is general in nature. Professional advice should be sought before acting on any aspect on this page. Financial planning services provided by TAG Financial Advisors Pty Ltd (ABN 77 154 205 017 AFSL 415632), a wholly owned subsidiary of TAG Financial Services Pty Ltd (ABN 67 075 374 686). Copyright 2022. Please do not reproduce without the expressed written consent of the author.